Washington Malaise Overshadows Markets Still

The dull trudge through this week only continued yesterday with the only salvation being that we will not have to relive that market session ever again. We are still looking for direction from politicians in Washington as to both the upcoming Budget decision and the more important matter of the debt ceiling in October. The US Treasury Secretary yesterday gave Congress a broadside on the risks of a default caused by messing about with the debt ceiling. He estimated that the US has currently only around $30bn of head room left on its commitments and that will have been erased by October 17th.

The credit rating agency Moody’s stated overnight that a lack of agreement over the debt ceiling would be worse than a government shutdown, however, neither is likely to lead to a cut in the country’s credit rating. Standard & Poor’s cut the United States’ rating from AAA to AA-plus in August 2011 during a previous round of debt ceiling debates. Moody’s rates the United States AAA with a stable outlook while Fitch has the US at AAA but with a negative outlook.

While recent data from Germany has been strong, a warning came from Bundesbank President Jens Weidmann yesterday that this will not remain the trend unless significant reforms are undertaken. Weidmann believes that Germany will lose its ‘economic edge’ if particular action is not taken over labour market policy, education and infrastructure spending. Germany, like Japan of late, is going through a demographical shift that will see a decline in working age citizens.

France’s most recent budget was published yesterday and alongside EUR3bn of tax rises, the country will see EUR15bn of spending cuts. These, combined with a tight monetary landscape – not so much in a rates setting but in an availability of credit sense – will keep the French economy very much under pressure. Germany may be taking the Eurozone forward but France has quite the weight on its back and we are unsure whether Germany can sustain this drag in the longer-term.

While focus has been elsewhere, the conversation around the UK has dampened somewhat in the past week or so. Last week’s retail sales disappointment has just clipped sterling’s wings and called into question the sustainability of the recent rally. Rate expectations via short sterling contracts have relaxed a bit and are no longer pricing a full rate hike by September 2014.

Today’s growth estimate is the 2nd revision to Q2’s GDP number and we are not expecting a deviation from the 0.7% of the previous release. Some members of the economic fraternity are looking for a pop higher to 0.8% but we believe this to be unwarranted and therefore expect a fairly dull to negative morning for GBP.

We also have the same revisions to US GDP this afternoon with recent data expected to push the number to 2.6% from 2.5% on an annualised basis. The one thing about GDP data is that it is historic and near term risks cannot be quantified. It is unlikely to smash higher, or the Fed would have tapered by now, you could argue. We also receive the latest US jobless claims numbers which, after a computer malfunction the past 2 weeks, should see a large increase in those taking benefits.